7 March 2008

IFRS 1 and IAS 27 Amendments

International Accounting Standards Board
30 Cannon Street
London EC4M 6XH
UK

Dear Sir/Madam,

Exposure Draft of Proposed Amendments to IFRS 1 First-Time Adoption of

International Financial Reporting Standards and IAS 27 Consolidated and
Separate Financial Statements: Cost of an Investment in a Subsidiary, Jointly
Controlled Entity or Associate

On behalf of the European Financial Reporting Advisory Group (EFRAG), I am

writing to comment on the Exposure Draft of Proposed Amendments to IFRS 1 First-
Time Adoption of International Financial Reporting Standards and IAS 27
Consolidated and Separate Financial Statements: Cost of an Investment in a
Subsidiary, Jointly Controlled Entity or Associate (the ED). This letter is submitted in
EFRAG’s capacity of contributing to the IASB’s due process and does not
necessarily indicate the conclusions that would be reached in its capacity of advising
the European Commission on endorsement of the definitive IFRS.

It can be difficult for an entity applying IFRS for the first time in its separate financial
statements to comply with certain of the requirements of IAS 27 relating to:

the cost of an investment in a subsidiary, jointly controlled entity or associate;

and

the treatment of dividends received from such investments,

particularly if, under previous GAAP, the carrying amount of the investments has
been measured in a manner that is not in accordance with the present IAS 27. The
objective of the ED is to provide some relief from those requirements. The ED
follows an earlier ED (issued in January 2007) that also sought to provide some relief
from the requirements. When we responded to that earlier ED (in our comment letter
dated 15 June 2007) we agreed that relief was needed, but had some concerns
about the relief proposed. We are pleased that the IASB has taken the decision to
make changes to the relief it proposed earlier and to issue a second ED on the
subject.

1
EFRAG supports, with one exception, the main amendments to IFRS 1 and IAS 27
proposed in the ED, , which we believe address fully the concerns we raised in our
earlier letter. Subject to our comment below, we believe the new proposals will
reduce the cost of adopting IFRSs in the parent separate financial statements, and
that may mean that more parent entities will apply IFRSs in both the separate
financial statements and consolidated financial statements. However, we do not
support the proposal that the receipt of a dividend from a subsidiary, jointly-controlled
entity or associate of the reporting entity should always trigger an impairment test of
the entity’s investment. In our view requiring a mandatory impairment test every time
such a dividend is received would be both unduly burdensome and unnecessary.

We have a few detailed comments. They are set out in the appendix to this letter.

If you would like further clarification of the points raised in this letter, please do not
hesitate to contact Charlotte Norre or me.

Yours sincerely

Stig Enevoldsen
EFRAG, Chairman

2
APPENDIX

Question 1—Deemed cost

The exposure draft proposes to allow an entity, at its date of transition to

IFRSs in its separate financial statements, to use a deemed cost to account for
an investment in a subsidiary, jointly controlled entity or associate. The
exposure draft proposes that an entity may choose as the deemed cost of such
investments either the fair value or the previous GAAP carrying amount of the
investment at the entity’s date of transition to IFRSs (see paragraphs 23A and
23B of the draft amendments to IFRS 1 and paragraphs BC8─BC13 of the Basis
for Conclusions).

Question 1: Do you agree with the two deemed cost options as they are
described in this exposure draft? If not, why?

1 We agree that some relief should be granted from the existing requirements in
IFRS 1 that apply when a first-time adopter is determining the cost of an
investment in a subsidiary, jointly controlled entity or associate in accordance
with IAS 27.

2 We believe that the proposals—by allowing an entity to use either the previous
GAAP carrying amount or fair value of the investment in a subsidiary, jointly
controlled entity or associate as deemed cost at date of the parents transition to
IFRSs in its separate financial statements—address fully the concerns we
expressed in our comment letter dated 15 June 2007. We support the proposed
amendments and agree with the IASB that they will reduce the cost of adopting
IFRSs in parent financial statements significantly.

Question 2—Change in scope

The exposure draft proposes that the deemed cost option should be available
for the initial measurement of investments in jointly controlled entities and
associates when an entity adopts IFRSs in its separate financial statements
(see paragraph BC14 of the Basis for Conclusions).

Question 2: Do you agree with the proposal to allow the deemed cost option
for investments in jointly controlled entities and associates? If not, why?

3 We agree with the proposal to allow the deemed cost option for investments in
jointly controlled entities and associates. It seems logical and is consistent with
the present exemption for business combinations in IFRS 1.B3 and the
guidance in IFRS 1.24 and 1.25 on the measurement of assets and liabilities of
subsidiaries, which also apply to associates and joint ventures.

Questions 3 and 4—Cost method

The exposure draft proposes to delete the definition of the ‘cost method’ from
IAS 27. Additionally, the exposure draft proposes to amend IAS 27 to require
an investor to recognise as income dividends received from a subsidiary,
jointly controlled entity or associate in its separate financial statements. The
receipt of this dividend requires the investor to test its related investment for
impairment in accordance with IAS 36 Impairment of Assets (see paragraphs 4
and 37B of the draft amendments to IAS 27 and paragraphs BC15─BC20 of the
Basis for Conclusions).

3
Question 3: Do you agree with the proposal to delete the definition of the ‘cost
method’ from IAS 27? If not, why?

4 We agree with the proposal to delete the definition of the “cost method” from
IAS 27. We believe that, by deleting this definition and in its place proposing
that any dividends paid by a subsidiary, jointly controlled entity or associate to
its parent entity shall be recognised as income by the parent in its separate
financial statements (see question 4), the number of cases where the previous
GAAP cost will be based on same principles as those underlying the IAS 27
numbers will increase. This means that for some parent entities it will no longer
be necessary to apply a deemed cost as proposed in the ED (because previous
GAAP cost would comply with the amended IAS 27).

Question 4: Do you agree with the proposed requirement for an investor to

recognise dividends received from a subsidiary, jointly controlled entity or
associate as income and the consequential requirement to test the related
investment for impairment? If not, why?

5 We agree with the proposal to recognise all dividends received from a

subsidiary, jointly controlled entity or associate as income (rather than the
return of some of the investment). We believe this will simplify the accounting.

6 However we do not agree with the proposal in paragraph 37B in the ED that, if
an investor accounts for its investments in the subsidiary, jointly controlled
entity or associate at cost in accordance with IAS 27, the receipt of a dividend
from such investments is an event that requires the investor to test the related
investment for impairment in accordance with IAS 36 Impairment of Assets. We
believe that such a requirement would be both unduly burdensome and
unnecessary. The requirement to perform an impairment test would, under the
proposals, be independent of whether there is any indication of impairment,
which would mean an impairment test would have to be carried out every time
a dividend is received from such an investment, even if the entity paying the
dividend has substantial accumulated reserves relative to the dividend being
paid. Furthermore, because the amendment is being made to IAS 27 rather
than in IFRS 1, this would apply not only to entities transitioning to IFRSs but to
all entities applying IFRSs that have such investments. This imposes a new
requirement on entities already applying IFRSs, who currently are required to
perform an impairment test only if there is an indication that there might have
been an impairment. EFRAG sees no reason for imposing this additional
burden on such companies. We suggest, instead of the proposal in the ED, the
IASB should enhance the existing test in paragraph 9 of IAS 36, perhaps by
stating in paragraph 12 of IAS 36 that the payment of dividends relative to the
accumulated reserves should be an indicator for the purposes of paragraph 9.

7 Also, we note that paragraph 37B talks of an investor to recognising dividends

received, when paragraph 30(c) of IAS 18 talks of recognising dividends when
the shareholder has a right to receive a dividend payment. This sounds
inconsistent. We suggest that the wording of paragraph 37B should be aligned
with that of paragraph 30(c) of IAS 18.

4
Question 5—Formation of a new parent

The exposure draft proposes that in applying paragraph 37(a) of IAS 27 to the
formation of a new parent, the new parent should measure cost using the
carrying amounts in the separate financial statements of the existing entity at
the date of the formation (see paragraph 37A of the draft amendments to IAS
27 and paragraphs BC21 and BC22 of the Basis for Conclusions).

Question 5: Do you agree with the proposed requirement that, in applying

paragraph 37(a) of IAS 27, a new parent should measure cost using the
carrying amounts of the existing entity? If not, why?

8 We support the objective of the proposed requirement. Our understanding

(based on BC22) is that it should apply in a very limited range of circumstances
only. We agree. However, we are concerned that more arrangements might
fall within the scope of the proposed wording of IAS 27.37A than BC22 seems
to envisage. We suggest that the circumstances to which the paragraph will
apply are described in more detailed in the paragraph to avoid unintended
application of the paragraph.

Question 6—Transition

The exposure draft proposes that the amendments to IFRS 1 and IAS 27 shall
be applied prospectively.

Question 6: Do you agree that prospective application of the proposed

amendments to IFRS 1 and IAS 27 is appropriate? If not, why?

9 We agree that the proposed amendments to IFRS 1 and IAS 27 should be

applied prospectively.

Comments on consequential amendments to other IFRSs

10 We agree with the amendments to other IFRSs proposed in the ED with two
exceptions.

11 The ED proposes to amend IAS 21 The Effects of Changes in Foreign

Exchange Rates, paragraph 49 as follows:

49 An entity may dispose of its interest in a foreign operation through sale, liquidation,
repayment of share capital or abandonment of all, or part of, that entity. The payment of
a dividend is part of a disposal only when it constitutes a return of the investment, for
example when the dividend is paid out of pre-acquisition profits. In the case of a partial
disposal, only the proportionate share of the related accumulated exchange difference is
included in the gain or loss. A write-down of the carrying amount of a foreign operation
does not constitute a partial disposal. Accordingly, no part of the deferred foreign
exchange gain or loss is recognised in profit or loss at the time of a write-down.

12 Although we understand why the sentence as drafted needs to be deleted, we

believe there will still be circumstances where the payment of a dividend is still
in substance a part disposal. Indeed for some entities the choice between
repayment of share capital and payment of a dividend is simply a matter of
legal form. We therefore believe that it would be appropriate to recycle the
exchange differences associated with such dividends. The changes to
paragraph 49 would however appear to mean that under all circumstances
dividends must be treated as income and separate consideration given to
impairments. As a consequence we presume that the recycling of exchange
differences associated with such impairments (“write downs”) would be

5
 prohibited. We are not sure if this is what the Board intended and it would be
helpful if this could be made clear. For example, our concern might be
addressed by only deleting the last part of the sentence (ie “for example when
the dividend is paid out of pre-acquisition profits”), thus leaving it open for an in
substance part disposal to be treated as such.

13 The ED proposes to amend paragraph 32 of IAS 18 Revenue as follows:

32 When unpaid interest has accrued before the acquisition of an interest-bearing

investment, the subsequent receipt of interest is allocated between pre-acquisition and
post-acquisition periods; only the post-acquisition portion is recognised as revenue.
When dividends on equity securities are declared from pre-acquisition profits, those
dividends are deducted from the cost of the securities. If it is difficult to make such an
allocation except on an arbitrary basis, dividends are recognised as revenue unless they
clearly represent a recovery of part of the cost of the equity securities.

14 It seems to us that, since the issuance of IAS 39 and its effective interest
method requirements, the sentence that has not been deleted has probably
been redundant. (In paragraph 30 of IAS 18 it is required to recognise interest
using the effective interest method in IAS 39. The effective interest method is
allocating the interest over the relevant period.) We therefore believe that the
first part of paragraph 32 can be deleted.